State-Level Performance Since Reforms of 1991

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STATE-LEVEL PERFORMANCE SINCE REFORMS OF 1991

STATE-LEVEL PERFORMANCE SINCE REFORMS OF 1991 India is a federal country consisting of twenty-eight states, and the division of responsibilities between the central government and the state governments is set forth in the Constitution. The states vary greatly in the level of per capita income, incidence of poverty, population size, resource endowments, and fiscal capacity, and the promotion of regional balance and equity among states is an acknowledged objective of national development policy. The regionalization of politics in India since the 1980s has focused attention on the performance of Indian states to a much greater extent than before, and the impact of the economic reforms since 1991 on their performance has also been a focus of attention.

Interstate Variations in Growth

While per capita growth in the economy as a whole accelerated in the period after the 1991 reforms, there is considerable variation in the experience of the individual states. Critics of the reforms sometimes present an exaggerated picture of the distributional impact of the reforms, arguing that only the richer states have benefited and that the poorer states have actually become poorer. In fact, none of the states has become poorer in the sense of experiencing negative growth in per capita income. On the contrary, all states have experienced a rise in per capita income, albeit at different rates. Nor is it the case that the richer states have benefited the most from the reforms. The two richest states at the start of the reforms were Punjab and Haryana, and both states actually decelerated in growth in the postreform period. The greatest acceleration in growth was experienced by two of the middle-income states, Maharashtra and Gujarat, while other middle-income states such as Tamil Nadu, Karnataka, and Kerala also accelerated. Two of the poorer states, West Bengal and Madhya Pradesh, also did better than in the prereform period. However, several of the lower-income states that are also very populous (Uttar Pradesh, Bihar, Orissa, and Rajasthan) saw a deceleration in growth compared with the prereform period. This deceleration occurred at a time when the expectation was one of acceleration, and the fact that there was acceleration in many other states produced an understandable sense of not being helped by the reforms.

Various measures of inequality suggest that interstate inequality, that is, inequality due solely to differences in per capita incomes across states, ignoring intrastate inequality, increased in the postreform period. This is an interesting finding, since available measures of inequality for the country as a whole (which are based on the distribution of consumption) do not show a significant increase in inequality in the postreform period.

Explanations for Growth Variation

Growth outcomes are obviously the result of initial endowments, investment rates, and economic policies, which determine the productivity of investment. Since the economic reforms were designed to promote economic efficiency, and were also applied to the entire country rather than to selected regions as in China, one might expect that they would improve growth performance in every state, which should lead to an acceleration in all states. The fact that some states actually decelerated calls for an explanation.

One possible explanation lies in the weakening of one of the two mechanisms traditionally used for promoting regional balance in India. One of these mechanisms, which was not affected by the reforms, was transfers from the central government to the state governments. These transfers took the form of distribution of a share of central government tax revenues to the states, with the proportion to be transferred and its distribution among the states being determined every five years by the Finance Commission; and distribution of central assistance to state finance plans, with the amount of the transfer and the distribution among states being determined by the Planning Commission. In each case, the formula used for interstate distribution explicitly favored states with lower per capita incomes. The second mechanism used to promote regional balance in the prereform period, which was affected by the reforms, was the direction of investments toward the poorer states. This was achieved either by deliberately locating public sector projects in these states, or by using the industrial licensing mechanism to push private investments toward these states.

The scale of public sector investment relative to private sector investments declined as a consequence of the economic reforms, making this option less effective. It also became impossible to direct private investment to particular regions following the abolition of industrial licensing in 1991. Thereafter, the location of private investment was driven by competitive considerations, and these were bound to redistribute investment toward better endowed states with favorable infrastructure—states that already had a faster rate of growth.

More generally, liberalization has meant an increase in the role of the state government in determining the investment climate in each state, and the individual states have varied greatly in the way they have responded. To the extent that the low-income states have responded less or more slowly than other states to the new challenges, it is likely that investment resources have moved away from these states to those that are seen as more investor-friendly. Such a process of reallocation of investment across states could lead to an actual deceleration in growth in some states even if the "investment climate" and "productivity" indicators in these states are no worse in absolute terms than before. This is simply because the relative position of other states has improved, attracting investment toward them. It is not possible to test whether this has happened in a rigorous fashion because investment data are not available at the state level, but anecdotal evidence suggests that some such factor has been at work.

Human Development

The picture of state performance presented by the gross domestic product (GDP) growth numbers needs to be supplemented by considering performance in other dimensions, especially human development indicators, and particularly the adult literacy rate and the infant mortality rate.

The performance regarding literacy suggests broad-based improvement in the postreform period. The nationwide adult literacy figure increased from around 52 percent in 1991 to about 65 percent in 2001, an increase of 13 percent in that decade, compared with an increase of only 9 percent in the decade from 1981 to 1991. The literacy rate has also risen substantially in most of the poorer states though the comparison with the 1980s presents a mixed picture. In Rajasthan there was an increase of 22 percent in the 1990s, compared with only about 14 percent in the 1980s. In Uttar Pradesh, the increase in the 1990s was just under 15 percent, marginally higher than in the 1980s. In Orissa, it was about 1 percent lower than the almost 15 percent increase in the 1980s. The least encouraging performance was in Bihar, which had an increase in the literacy rate of only 8.5 percent in the 1990s, which was actually lower than the increase of over 12 percent in the 1980s.

The infant mortality rate (IMR) is generally regarded as a robust indicator of the well-being and health status of the population, especially of the poorer sections. There were large differences in the IMR across states at the start of the reforms, with Kerala being the best performer with an IMR of 16, while Orissa was the worst with an IMR as high as 124. There is evidence of progress in almost all states in the postreform period, but in this dimension the rate of progress in the 1990s is much less than in the 1980s. The IMR for India as a whole declined from 110 in 1981 to 80 in 1991, but in the subsequent decade, the decline was much slower, reaching 66 in 2001. The picture for individual states shows considerable variation. Kerala was able to reduce the IMR from 16 to 11 over the decade, and many states (Maharashtra, Madhya Pradesh, West Bengal, Uttar Pradesh, Karnataka, Gujarat, Orissa) also showed a significant improvement. However, there was relatively little improvement or even a small deterioration in Bihar, Punjab, Haryana, and Rajasthan.

The Role of the States in the Postreform Period

One consequence of the economic reforms has been an increase in the role of the private sector, which in turn implies that the role of government must shift to delivering essential public services, such as health and education, as well as the creation of infrastructure and an environment of good governance, which would improve the investment climate and increase productivity. In all these areas, it is the state governments that have a major role. Health, education, the creation of rural infrastructure related to irrigation, watershed development, all roads except the national highways, and the supply of electric power are all within the domain of the states, and the administrative instruments for delivering these services are controlled by the state governments. The central government can only help fund programs in the areas that are implemented by state administrative structures.

Although substantial financial resources are being devoted to various types of development programs in these areas, especially education, health, and rural development, their effectiveness in achieving expected objectives is low. In education, for example, enrollment rates indicate that 93 percent of children in the relevant age groups are enrolled in primary schools, but a very large proportion drop out before completing primary school, and the quality of education provided is often inadequate. Similar problems exist in health and other sectors.

There is a growing consensus that public service delivery in India could be greatly improved by shifting from top-down systems of planning and managing programs toward greater involvement of local communities in the design of programs, with prioritization among different programs delegated to lower levels of government to reflect the priorities of the local communities, and also to ensure more active involvement of the local community in monitoring and accountability. One way of achieving this objective is to empower the elected local government institutions, the socalled panchayati raj institutions, which consist of an elected village council (gram panchayat) at the village level, the block panchayat at the next higher level, and the zilla parishad at the district level (the last two being composed largely of representatives from the lower-level bodies). In 1994 the Constitution was amended to establish a regular system of election to these institutions and to identify subjects that would be their responsibility. The system of electing representatives to these local bodies has been put in place, and their areas of responsibility have also been determined. However, some of the other steps needed, notably financial devolution of resources from the state to panchayat level, and the transfer of control over functionaries to the local level, has yet to be achieved. Some states—notably the southern states—have made greater progress than others, but a great deal more remains to be done in all parts of the country. Genuine empowerment of the panchayati raj institutions will make a major contribution to the effectiveness of service delivery programs in the states, and differences in this dimension of performance are likely to contribute to interstate variations in the future.

One of the most important determinants of economic growth in individual states will be the quality of the electric power supply, as this will affect not only industrial and commercial growth but also agricultural development, especially the diversification of agriculture. Reform of the power sector is perhaps the most important unfinished reform in India, and the key to success lies in improvements in electricity distribution. At present, the state-run electricity distribution systems suffer from losses ranging from 35 to 40 percent in most states. This partly reflects technical losses in transmission, but mainly represents theft of electricity through underbilling, usually in connivance with the utility staff. Tariff structures are also uneconomical, with some categories of consumers (farmers and households) obtaining power at unrealistically low rates. The result is that the state utilities are financially unviable and unable to undertake the large investments needed to ensure an adequate supply of good-quality power. Reform of the power sector requires a gradual move toward rational user charges in which cross-subsidies are kept to a reasonable level and improvements are achieved in collection efficiency, either through improved management of the public sector system or through privatization. Thus far, only Orissa and Delhi have opted for privatization, and it is too early to pronounce whether the initiative is successful.

Progress in all these areas will depend upon how energetically state governments address these problems. As in other areas, performance will vary, but hopefully the diversity of experience will generate lessons on what works and what does not. A very hopeful development in the postreform period is the growth of awareness in the states that the state governments must work to create a favorable investment climate. Several nongovernmental bodies routinely engage in rating states regarding this issue, and the publicity given these ratings is generating healthy competition.

Montek S. Ahluwalia

See alsoEconomic Reforms of 1991 ; Economy since the 1991 Economic Reforms ; State Finances since 1952

BIBLIOGRAPHY

Ahluwalia, Montek S. "State Level Performance and Economic Reforms in India." In Economic Policy Reforms and the Indian Economy, edited by Anne O. Krueger. Chicago: University of Chicago Press, 2002.

Bajpai, N., and Jeffrey Sachs. "Trends in Inequality of Income in India." Harvard Institute for International Development Discussion Paper, no. 528.

Cashin P., and Ratna Sahay. "Regional Economic Growth and Convergence in India." Finance and Development (March 1996).

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State-Level Performance Since Reforms of 1991